Independent auditors report to the members of Hikma Pharmaceuticals plc

Transcription

1 Financial statements We continue to deliver accurate, high-quality and timely information to all stakeholders with the utmost integrity and efficiency. 113 Independent auditors report 122 Consolidated financial statements 172 Company financial statements 174 Notes to the Company financial statements 112

2 Independent auditors report to the members of Hikma Pharmaceuticals plc Financial statements Report on the audit of the financial statements Our opinion In our opinion: Hikma Pharmaceuticals plc s Group financial statements and Company financial statements (the financial statements ) give a true and fair view of the state of the Group s and of the Company s affairs as at 31 December and of the Group s loss and cash flows for the year then ended; the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards ( IFRSs ) as adopted by the European Union; the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 Reduced Disclosure Framework, and applicable law); and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We have audited the financial statements, included within the Annual Report, which comprise: the consolidated and parent Company balance sheets as at 31 December ; the consolidated income statement and statement of comprehensive income, the consolidated cash flow statement, and the consolidated and parent Company statements of changes in equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies. Our opinion is consistent with our reporting to the Audit Committee. Separate opinion in relation to IFRSs as issued by the IASB As explained in Note 2 to the financial statements, the Group, in addition to applying IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board ( IASB ). In our opinion, the Group financial statements have been properly prepared in accordance with IFRSs as issued by the IASB. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) ( ISAs (UK) ) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC s Ethical Standard were not provided to the Group or the Company. Other than those disclosed in Note 6 to the financial statements, we have provided no non-audit services to the Group or the Company in the period from 1 January to 31 December. 113 Hikma Pharmaceuticals PLC

3 Independent auditors report to the members of Hikma Pharmaceuticals PLC continued Materiality Audit Scope Areas of Focus Our audit approach Overview Overall Group materiality: $14,000,000 (: $13,275,000), based on 5% of profit before tax after adding back certain non-recurring items such as impairment charges, indemnity income relating to the Group s acquisition activity, severance and other expenses resulting from the planned restructuring of the Eatontown, New Jersey manufacturing facility and the impact of US tax reform. Overall Company materiality: capped at $10,000,000 (: $13,275,000), but calculated based on 1% of total assets. For the purposes of the Group audit, we applied a lower materiality to Company balances and transactions, other than those which were eliminated on consolidation in the Group financial statements. Our audit included full scope audits of seven components, procedures on specific financial statement line items of one component and procedures performed centrally over specific material balances at other locations around the world. Taken together these account for 83% of consolidated revenue, 73% of consolidated profit before tax and 88% of consolidated total assets. Impairment of goodwill and intangible assets; Revenue recognition chargebacks, returns and other revenue deductions; Taxation; Carrying value of investments in subsidiaries (Company only). The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We gained an understanding of the legal and regulatory framework applicable to the Group and Company and the industry in which they operate, and considered the risk of acts by the Group and Company which were contrary to applicable laws and regulations, including fraud. We designed audit procedures at Group and significant component level to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. We designed audit procedures that focused on laws and regulations that could give rise to a material misstatement in the event of non-compliance particularly relating to, but not limited to, regulations set out by the United States Food and Drug Administration (the FDA ) and other industry regulators, defence of products, pricing and practices legislation, taxation and anti-bribery and corruption legislation. Our tests included, but were not limited to, enquiries of management, review of related work performed by component audit teams, review of relevant Internal Audit reports and discussions with in-house legal counsel supplemented by review of external legal counsel correspondence. There are inherent limitations in the audit procedures described above as the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. As in all of our audits, we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud, and the risk of fraud in revenue recognition. Procedures designed and executed to address these risks included use of data enabled auditing techniques to test journal entries and post-close adjustments, testing and evaluating management s key accounting estimates for reasonableness and consistency, undertaking cut-off procedures to verify proper cut-off of revenue and expenses and testing the existence and accuracy of revenue transactions. In addition, we incorporate an element of unpredictability into our audit work each year Key audit matters Key audit matters are those matters that, in the auditors professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. 114

4 Financial statements Impairment of goodwill and intangible assets Key audit matter The Group has goodwill of $282 million and intangible assets of $503 million (31 December : $682 million and $1,037 million, respectively) comprising customer relationships, product related intangible assets, software and other identified intangible assets. This is contained within three cash generating units ( CGUs ). How our audit addressed the key audit matter With support from our valuations specialists, we obtained the Group s impairment analyses and tested the integrity of the calculations, reasonableness of key assumptions, including product profit and cash flow growth or decline, terminal values and discount rates. We challenged management to substantiate its assumptions, including comparing relevant assumptions to industry forecasts. All CGUs containing goodwill and indefinite lived intangible assets must be tested for impairment annually. The determination of carrying values, requires judgement on the part of management in identifying and then estimating the higher of the value in use and a fair value less cost to dispose for the relevant CGUs. These amounts are based on management s view of future cash flow forecasts and external market conditions such as future pricing probability of technical and regulatory success and the most appropriate discount rate. For the year ended 31 December, the Group has recorded $1,105 million as an exceptional impairment charge, principally in relation to a number of events that occurred in the second half of including the continued delay in approval of its application for its generic version of Advair Diskus and sustained pricing pressures and erosion in the US generics market. This impairment charge was recorded in respect of goodwill, marketed products and products under development in the Group s US segment, as well as fixed assets underpinning the manufacturing process in this segment. As the carrying values of goodwill and intangible assets are contingent on future cash flows, there is a risk that the assets will be further impaired if these cash flows do not meet the Group s expectations. The impairment reviews performed by the Group contained a number of significant judgements and estimates including revenue growth, the success of new product launches, profit margins, cash conversion, terminal values and discount rate. In particular the assumptions made in respect of its version of generic Advair Diskus are particularly sensitive. Changes in these assumptions could lead to further impairment to the carrying value of intangible assets and goodwill. We focused on intangible assets in the Westward Columbus Cash Generating Unit which were largely acquired from Boehringer Ingelheim in February given the events detailed above. Refer to Notes 3 and 14 in the Group financial statements and the audit committee review of areas of significant judgement pages 78 and 79. We assessed the determination of the CGUs identified for the impairment calculation by considering the CGU s previously used as well as from our understanding of the business and how it is monitored. In particular, given the key sensitivity around future cash flows we performed the following procedures, with significant involvement from senior engagement team members: corroborated the information to board approved budgets and forecasts; understood management s process for forecasting cash flows, which is underpinned by a model that encompasses a product by product analysis, and we challenged management s market and pricing assumptions by comparing them to historical and third party market data. We also utilised our valuations specialists to identify any anomalies or trends that warranted further investigation and corroboration; in respect of costs and resulting profit margins in management s model, we challenged management on forecasted trends and assumed cost savings in the context of the Group s plans for ongoing product development, maintenance of its manufacturing facilities via capital expenditure and other investment and plans for organic growth; undertook look back testing to understand how accurate management had been in its previous forecasting; took into account that historically the Group has faced challenges in respect of reliably forecasting cash flows and challenged the rate used to discount the cash flows to appropriately assess the supportability of the forecast, as well as management s process for building up a forecast through detailed testing of revenue, cost, margin and other inputs, including performing sensitivity analyses on these assumptions to understand the resulting impact on the impairment charge; in respect of generic Advair Diskus, we obtained and reviewed correspondence from the FDA, engaged in discussions with management to understand how its key assumptions around expected launch date and anticipated market share impacted forecast cash flows and examined external data to corroborate management s views; for impairment charged against the Group s In Process Research & Development ( IPRD ) in we corroborated products included in the valuation model to minutes from the Product Review Committee meetings, where decisions on pipeline and IPRD opportunities are made; considered analysts reports and other market information over expected future market shares and pricing; and recalculated the weighted average cost of capital and considered if the amount was within a reasonable range. We also obtained management s sensitivity analyses which showed the impact of reasonably possible changes to key assumptions. We considered whether these were the key sensitivities and compared the output to a reasonable range based on the evidence available. We validated the appropriateness of the related disclosures in Note 14 of the financial statements. We considered the presentation of the impairment charge as an exceptional charge in in the context of the nature and magnitude of the charge itself, giving consideration to the Group s policy for exceptional items. We reviewed the Annual Report to form a view on whether the disclosures contained therein are fair, balanced and understandable. Based on our procedures we consider management s key assumptions to be within a reasonable range and the overall impairment charge, whilst judgemental, to also lie within an acceptable range. For those intangible assets including goodwill where management determined that no impairment was required, we found that these judgements were supported by reasonable assumptions. 115 Hikma Pharmaceuticals PLC

5 Independent auditors report to the members of Hikma Pharmaceuticals PLC continued Revenue recognition Key audit matter Management is required to make certain judgements in respect of revenue recognition and the level of chargebacks, returns and other revenue deductions that will be realised against the Group s revenue. These estimates are material to the financial statements and involve judgement, hence the reason for inclusion as an area of focus. The largest of these judgements relates to revenue recognition, chargebacks, rebates and returns in the US for which the Group recorded revenue deductions for the year ended 31 December of $1,933 million (: $1,822 million). We focused on this area as rebates, discounts, allowances and returns arrangements and the deductions from gross revenue are complex and because establishing an appropriate accrual requires significant estimation by the directors. This judgement is complex in a US healthcare environment in which competitive pricing pressure and product discounting are trends. The directors have determined an accrual of $388 million to be necessary at 31 December (: $397 million). Refer to the audit committee review of areas of significant judgement pages 78 and 79, significant accounting policies Note 2, trade and other receivables Note 20 and other current liabilities Note 27. How our audit addressed the key audit matter We considered the Group s processes for making judgements in this area and performed the following procedures: We assessed applicable controls in place around this process, tested the nature of the pricing arrangements and the accuracy of calculations and agreed the rates in customer agreements with those used in management s calculations of the required reserves and deductions. We obtained management s calculations for accruals under applicable schemes and validated the assumptions used by reference to the Group s stated commercial policies, the terms of the applicable contracts and historical levels of product returns. We compared the assumptions to contracted prices, historical rebates, discounts, allowances and returns levels (where relevant) and to current payment trends. We also considered the historical accuracy of the Group s estimates in previous years and the impact of competitive pricing pressures and greater discounting in the US market more generally. We formed an independent expectation of the largest elements of the reserve at 31 December using third party data and compared this expectation to the actual accrual recognised by the Group. Based on the procedures performed, we did not identify any material differences between our independent expectations and the accrual recorded. Taxation Key audit matter How our audit addressed the key audit matter The Group operates across a large number of jurisdictions due to its geographic spread, resulting in complex cross-border tax arrangements. As a result, it is subject to periodic challenges by local tax authorities on a range of tax matters during the normal course of business including transaction related tax matters and transfer pricing arrangements. In addition and following the Group s acquisition of West-Ward Columbus in, the Group undertook legal entity rationalisation and restructuring in in support of maintaining the operational structure which had several complex tax consequences. Judgement is required in assessing the level of provisions required in respect of uncertain tax positions. At 31 December, the Group has recorded provisions of $63 million in respect of uncertain tax positions (: $64 million). There have also been a number of changes in tax law in the US and elsewhere that have resulted in a material impact on the Group s current and deferred tax balances at 31 December. The most significant of these has been as a result of the Tax Cuts and Jobs Act being substantively enacted before year-end. In aggregate, the total adjusting item to account for the impact amounts to $49 million in the tax line. The changes include a reduction in the corporate tax rate that should be applied to deferred taxation balances and changes to the foreign taxation credits regime. Some of these changes are complex and there are a number of areas of uncertainty relating both to the manner in which the law will apply and how to account for these matters. Therefore we have focused on this area in our audit. Refer to Notes 11 and 17 in the Group financial statements. In conjunction with our UK, US, international tax and transfer pricing specialists, we evaluated and challenged management s judgements in respect of the ongoing taxation impacts of the West-Ward Columbus acquisition, estimates of tax exposures and contingencies in order to assess the adequacy of the Group s tax provisions, estimates involved in the measurement of uncertain tax provisions and judgements taken in the measurement of deferred tax assets. We assessed the application of International Accounting Standard 12 Income Taxes in determining the tax base of the deferred tax assets, and assessed recoverability of assets against forecast taxable income. Where this has involved judgements, we challenged the judgements made by management and evaluated these in the context of the evidence available including examining correspondence with tax authorities. In understanding and evaluating management s judgement relating to the level of provisioning for uncertain tax positions, we considered the status of ongoing tax authority audits, the outcome of previous tax authority audits, and developments in the tax environment. We considered management s disclosures in this regard and we agreed with management s view that a material change to the Group s estimates of tax exposures is not expected within the next 12 months. For the tax effects as a result of the US tax reform we have discussed the key judgements made in assessing these implications with management and we agree that these are appropriate. We have also verified the mathematical accuracy of the current and deferred tax calculated on the revised basis. Based on this we believe that management s position is appropriate. However, as there remains significant complexity in the new law and a number of areas of uncertainty relating both to the manner in which the law will apply and to the accounting in certain areas, we expect that there will be true-ups and updates to the estimates as further guidance is issued. We consider that the level of uncertain tax provisioning and disclosure is acceptable in the context of the Group s financial statements. 116

6 Financial statements Carrying value of investments in subsidiaries (Company only) Key audit matter How our audit addressed the key audit matter The Company holds investments in subsidiaries of $3,323 million at 31 December (: $3,179 million). Investments in subsidiaries are accounted for at cost less impairment in the Company balance sheet at 31 December. Investments are assessed for impairment annually or earlier if impairment indicators exist. If such indicators exist, the recoverable amounts of the investments in subsidiaries are estimated in order to determine the extent of the impairment loss, if any. Any such impairment loss is recognised in the income statement. Management judgement is required in the area of impairment testing, particularly in determining whether any impairment triggers have arisen that necessitate carrying out an impairment review to assess whether the carrying value of an asset can be supported by the recoverable amount which is determined by reference to the Group s market capitalisation and in the context of the net assets underpinning the Company s investment in subsidiaries. Refer to Note 47 in the parent company financial statements. We evaluated management s assumption whether any indicators of impairment existed by comparing the net assets of the subsidiaries at 31 December with the Company s investment carrying values. For those investments where the subsidiaries net assets were lower than the carrying values, we considered their recoverable value by reference to the Group s market capitalisation at 31 December and the valuations implied by other models and for goodwill impairment review purposes, all of which were subject to audit procedures as part of our Group audit. Within the Company accounts we have performed procedures to ensure the cost of investment balance of $3,323 million is supported. These procedures have included auditing the assets and considering actual and expected performance of the businesses underpinning each of the investments. As a result of our work, we agreed with management that the carrying values of the investments held by the Company are supportable. 117 Hikma Pharmaceuticals PLC

7 Independent auditors report to the members of Hikma Pharmaceuticals PLC continued How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the Company, the accounting processes and controls, and the industry in which they operate. Procedures were performed prior to year-end to evaluate component procedures and controls, and visits were undertaken by senior team members to component locations, to refine the audit approach and ensure sufficient oversight of component auditors. As at 31 December, Hikma Pharmaceuticals plc had in total 66 entities (subsidiaries and associates) as part of the Group. These entities may operate solely in one segment but more commonly operate across two. Each territory ( component ) submits a Group reporting package to Hikma s central accounting team including its income and financial position prepared under Group accounting policies which are in compliance with IFRSs. We requested component teams in the US (West-Ward Pharmaceuticals and West-Ward Columbus), Jordan (Hikma Pharmaceuticals), Saudi Arabia (Hikma Al Jazeera Pharmaceuticals Industries), Algeria (Hikma Pharma Algeria) and Portugal (Hikma Farmaceutica) to audit reporting packages of certain entities in these territories and report the of their full scope audit work to us. This work was supplemented by procedures over specific balances performed on West-Ward Pharmaceuticals International Limited (WWPIL) and procedures performed centrally including the consolidation, taxation and certain component balances not covered by local component teams. The involvement of the Group audit team in the work of the component auditors included conference calls, meetings with local management, review of working papers, attendance at audit clearance meetings, and other forms of communication as considered necessary depending on the significance of the component and the extent of accounting and audit issues arising. Senior members of the Group audit team also visited the US, Algeria and Jordan. Taken together our audit work accounted for 83% of consolidated revenue, 86% of the adjusted profit measure we use as a basis for determining materiality and 73% of consolidated profit before tax. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group financial statements Company financial statements Overall materiality $14,000,000 (: $13,275,000) $10,000,000 (: $13,275,000) How we determined it Rationale for benchmark applied 5% of profit before tax after adding back certain non-recurring items such as impairment charges, indemnity income relating to the Group s acquisition activity, severance and other expenses resulting from the planned restructuring of the Eatontown, New Jersey manufacturing facility and the impact of US tax reform. The Group s principal measure of earnings is core profit. Management believes that it reflects the underlying performance of the Group and is a more meaningful measure of the Group s performance. We took this measure into account in determining our materiality but did not add back certain non-core items unless we deemed them to be non-recurring in nature. Our materiality would have been higher if we had adjusted for all non-core items. 1% of total assets. This was capped at $10,000,000 (: $13,275,000), but calculated based on 1% of total assets. For the purposes of the Group audit, we applied a lower materiality to Company balances and transactions, other than those which were eliminated on consolidation in the Group financial statements. There is no income statement presented for the parent Company, as the entity takes the Companies Act 2006 s408 exemption, and therefore users of the financial statements are not relying on this figure to make economic decisions. The Company holds the Group s investments and performs treasury functions on behalf of the Group. Therefore, the entity is not in itself profit-oriented. The strength of the balance sheet is the key measure of financial health that is important to shareholders since the primary concern for the parent Company is the payment of dividends and servicing of debt. For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between $1 million and $10 million. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above $500,000 (Group and Company audits) (: $500,000) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. 118

8 Financial statements Going concern In accordance with ISAs (UK) we report as follows: Reporting obligation We are required to report if we have anything material to add or draw attention to in respect of the directors statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors identification of any material uncertainties to the Group s and the Company s ability to continue as a going concern over a period of at least twelve months from the date of approval of the financial statements. We are required to report if the directors statement relating to going concern in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit. Reporting on other information Outcome We have nothing material to add or to draw attention to. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group s and Company s ability to continue as a going concern. We have nothing to report. The other information comprises all of the information in the Annual Report other than the financial statements and our auditors report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. Strategic Report and Directors Report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors Report for the year ended 31 December is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06) In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Directors Report. (CA06) Corporate Governance Statement In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement (on page 74) about internal controls and risk management systems in relation to financial reporting processes and about share capital structures in compliance with rules and of the Disclosure Guidance and Transparency Rules sourcebook of the FCA ( DTR ) is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not identify any material misstatements in this information. In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement (on page 74) with respect to the Company s corporate governance code and practices and about its administrative, management and supervisory bodies and their committees complies with rules 7.2.2, and of the DTR. We have nothing to report arising from our responsibility to report if a corporate governance statement has not been prepared by the Company. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Strategic Report, Directors Report and Corporate Governance Statement, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006, (CA06), ISAs (UK) and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required by ISAs (UK) unless otherwise stated). 119 Hikma Pharmaceuticals PLC

9 Independent auditors report to the members of Hikma Pharmaceuticals PLC continued The directors assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group We have nothing material to add or draw attention to regarding: The directors confirmation on page 61 of the Annual Report that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. The directors explanation on page 65 of the Annual Report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing to report having performed a review of the directors statement that they have carried out a robust assessment of the principal risks facing the Group and statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the Code ); and considering whether the statements are consistent with the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit. (Listing Rules) Other Code Provisions We have nothing to report in respect of our responsibility to report when: The statement given by the directors, on page 111, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the Group s and Company s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group and Company obtained in the course of performing our audit. The section of the Annual Report on pages 78 to 81 describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. The directors statement relating to the Company s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified, under the Listing Rules, for review by the auditors. Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Directors Responsibility Statement set out on page 111, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group s and the Company s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so. Auditors responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC s website at: auditorsresponsibilities. This description forms part of our auditors report. Use of this report This report, including the opinions, has been prepared for and only for the Company s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Directors Remuneration In our opinion, the part of the Directors Remuneration Report to be audited has been properly prepared in accordance with the Companies Act (CA06) 120

10 Financial statements Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: we have not received all the information and explanations we require for our audit; or adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or certain disclosures of directors remuneration specified by law are not made; or the Company financial statements and the part of the Directors Remuneration Report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Appointment Following the recommendation of the Audit Committee, we were appointed by the directors on 11 May to audit the financial statements for the year ended 31 December and subsequent financial periods. The period of total uninterrupted engagement is 2 years, covering the years ended 31 December to 31 December. Mark Gill Senior Statutory Auditor for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 13 March Hikma Pharmaceuticals PLC

11 Consolidated income statement For the year ended 31 December Exceptional items and other adjustments (Note 5) Exceptional items and other adjustments (Note 5) Note Core Reported Core Reported Revenue 4 1,936 1,936 1,950 1,950 Cost of sales 4 (963) (6) (969) (932) (32) (964) Gross profit (6) 967 1,018 (32) 986 Sales and marketing expenses (188) (48) (236) (184) (37) (221) General and administrative expenses (238) (1) (239) (208) (36) (244) Research and development expenses (115) (6) (121) (126) (24) (150) Other operating expenses (net) 8 (46) (1,072) (1,118) (81) 12 (69) Total operating expenses (587) (1,127) (1,714) (599) (85) (684) Operating profit/(loss) (1,133) (747) 419 (117) 302 Finance income Finance expense 10 (60) (26) (86) (63) (41) (104) Profit/(loss) before tax 328 (1,066) (738) 359 (149) 210 Tax 11 (72) (29) (101) (80) 28 (52) Profit/(loss) for the year (1,095) (839) 279 (121) 158 Attributable to: Non-controlling interests Equity holders of the parent 252 (1,095) (843) 276 (121) 155 Earnings/(loss) per share (cents) 256 (1,095) (839) 279 (121) 158 Basic (351.3) Diluted (349.8)

12 Consolidated statement of comprehensive income Financial statements For the year ended 31 December Exceptional Items and other adjustments (Note 5) Exceptional Items and other adjustments (Note 5) Note Core Results Reported Core Reported Profit/(loss) for the year 256 (1,095) (839) 279 (121) 158 Other Comprehensive Income/(loss) Items that may be reclassified subsequently to the income statement, net of tax: Effect of change in investment designated at fair value Exchange difference on translation of foreign operations (90) (90) Total comprehensive income/(loss) for the year 278 (1,095) (817) 190 (121) 69 Attributable to: Non-controlling interests Equity holders of the parent 275 (1,095) (820) 190 (121) (1,095) (817) 190 (121) Hikma Pharmaceuticals PLC 123

13 Consolidated balance sheet At 31 December Non-current assets Goodwill Other intangible assets ,037 Property, plant and equipment Investment in associates and joint ventures Deferred tax assets Financial and other non-current assets Current assets Note 1,814 2,915 Inventories Income tax receivable 53 2 Trade and other receivables Collateralised and restricted cash Cash and cash equivalents Other current assets ,574 1,448 Total assets 3,388 4,363 Current liabilities Bank overdrafts and loans Trade and other payables Income tax provision Other provisions Other current liabilities Net current assets Non-current liabilities Long-term financial debts Obligations under finance leases Deferred tax liabilities Other non-current liabilities ,063 1,034 Total liabilities 1,860 1,952 Net assets 1,528 2,411 Equity Share capital Share premium Own shares 35 (1) (1) Other reserves 1,193 2,075 Equity attributable to equity holders of the parent 1,514 2,396 Non-controlling interests Total equity 1,528 2,411 The financial statements of Hikma Pharmaceuticals PLC, registered number , on pages 122 to 171 were approved by the Board of Directors on 13 March 2018 and signed on its behalf by: Said Darwazah Director 13 March 2018 Mazen Darwazah Director

14 Consolidated statement of changes in equity Financial statements For the year ended 31 December Merger and Revaluation reserves Translation reserves Retained earnings Total reserves Share capital Share premium Own shares Equity attributable to equity shareholders of the parent Noncontrolling interests Balance at 1 January 38 (161) 1,144 1, (1) 1, ,352 Profit for the year Effect of change in investment designated at fair value (Note 23) Currency translation loss (87) (87) (87) (3) (90) Total comprehensive income/(loss) for the year (87) Total transactions with owners, recognised directly in equity Issue of equity shares for acquisition of a subsidiary 1,039 1, ,044 1,044 Cost of equity-settled employee share scheme (Note 38) Deferred tax arising on share-based payments Dividends on ordinary shares (Note 12) (77) (77) (77) (1) (78) Acquisition of subsidiaries 1 1 Balance at 31 December and 1 January 1,077 (248) 1,246 2, (1) 2, ,411 Loss for the year** (1,039) 196 (843) (843) 4 (839) Effect of change in investment designated at fair value (Note 23) Currency translation gain/(loss) (1) 20 Total comprehensive (loss)/income for the year (1,039) (821) (821) 3 (818) Total transactions with owners, recognised directly in equity Cost of equity-settled employee share scheme (Note 38) Dividends on ordinary shares (Note 12) (79) (79) (79) (2) (81) Adjustment arising from change in non-controlling interests* (4) (4) (4) (2) (6) Balance at 31 December 38 (227) 1,382 1, (1) 1, ,528 Total equity * During the year the Group acquired the remaining stake in Ibn Al Baytar bringing the total ownership to 100%. This was completed in April. ** A loss of $1,039 million has been allocated from retained earnings to the merger and revaluation reserves in relation to West-Ward Columbus impairment (Notes 5, 14 and 15). 125 Hikma Pharmaceuticals PLC 125

15 Consolidated cash flow statement For the year ended 31 December Note Cash generated from operating activities Income tax paid (103) (76) Net cash generated from operating activities Investing activities Purchases of property, plant and equipment (107) (122) Proceeds from disposal of property, plant and equipment 4 1 Purchase of intangible assets Proceeds from disposal of intangible assets (44) (68) 24 Cash received from investment in joint ventures 2 Investment in financial and other non-current assets (2) (11) Investment in available for sale investments (8) (6) Acquisition of business undertakings net of cash acquired* 3 (515) Finance income 1 2 Net cash used in investing activities (151) (695) Financing activities Increase/(decrease) in collateralised and restricted cash 3 (4) Proceeds from issue of long-term financial debts Repayment of long-term financial debts (401) (326) Proceeds from short-term borrowings Repayment of short-term borrowings Dividends paid (349) (337) (79) (77) Dividends paid to non-controlling shareholders of subsidiaries (2) (1) Interest paid (57) (54) Purchase of non-controlling interest in subsidiary (6) (Payment)/proceeds from co-development and earnout payment agreement, net (1) 2 Net cash (used in)/generated by financing activities (220) 19 Net increase/(decrease) in cash and cash equivalents 72 (383) Cash and cash equivalents at beginning of year Foreign exchange translation movements (15) Cash and cash equivalents at end of year * During the year, the Group received a $3 million payment from Boehringer Ingelheim in respect of the price adjustment receivable to the West-Ward Columbus acquisition

16 Notes to the consolidated financial statements Financial statements 1. Adoption of new and revised standards The following new and revised Standards and Interpretations have been adopted in the current year. Their adoption has not had any significant impact on the amounts reported in these financial statements but may impact the accounting for future transactions and arrangements. IAS 7 (Amendments) Statement of cash flows on disclosure initiative The following Standards and Interpretations have not been applied in these financial statements because while in issue, are not yet effective (and in some cases have not yet been adopted by the EU): IFRS 9 IAS 12 (Amendments) IFRS 15 IFRS 15 (Amendments) IFRS 40 (Amendments) IFRS 4 (Amendments) IFRS 16 IFRS 2 (Amendments) IFRIC 22 IFRIC 23 IFRS 17 Annual improvements Annual improvements Financial instruments Income taxes on Recognition of deferred tax assets for unrealised losses Revenue from contracts with customers Revenue from contracts with customers Investment property Insurance contracts Leases Share based payment Foreign currency transactions and advance considerations Uncertainty over income tax treatments Insurance contracts IFRS 9 Financial instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. The new version of IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective application is required; but providing comparative information is not mandatory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Group plans to adopt the new standard on the effective date and will not restate comparative information. (a) Classification and measurement The Group does not expect a significant impact on its balance sheet or equity upon applying the classification and measurement requirements of IFRS 9. Loans as well as trade receivables are generally held to collect contractual cash flows and are expected to give rise to cash flows solely representing payments of principal and interest. The Group believes that the contractual cash flow characteristics of those instruments meet the criteria for amortised cost measurement under IFRS 9 and any reclassification of these instruments is estimated to be minimal. (b) Impairment IFRS 9 requires the Group to record expected credit losses on all of its debt securities, loans and trade receivables, either on a 12-month or lifetime basis. The Group will apply the simplified approach and record lifetime expected losses on all trade receivables and will not restate comparative information. During, the Group has performed an impact assessment of IFRS 9 to estimate the additional provision to be recorded resulting from the expected credit loss from its trade receivables and anticipated no significant change in level of impairment recognised compared to that based on current procedures. IFRS 15 Revenue from contracts with customers The IASB issued IFRS 15 Revenue from contracts with customers ( IFRS 15 ) in May Subsequent amendments, Clarifications to IFRS 15, were issued in April. Both of these have now been endorsed by the EU. The new amended standard replaces IAS 18 Revenue, IAS 11 Construction Contracts and other existing revenue interpretations. IFRS 15 sets out new requirements for recognising revenue and costs from contracts with customers. In particular, it outlines new principles for an entity to follow in determining the measurement and recognition of revenue using a five-step model. This model requires revenue to be recognised when or as goods or services are transferred to customers based on the consideration to which the entity expects to be entitled. The new standard is required to be applied by the Group from 1 January 2018 and hence IFRS 15 will be adopted in the financial statements for the year ending 31 December While our assessment remains ongoing, from work performed to date, which has included a detailed review of some of our largest customer contracts: as the majority of the Group s revenues are derived from the supply of goods, (i.e. a single performance obligation), the transition to IFRS 15 is not anticipated to have a significant impact on the Group s revenue recognition (including the approach applied under IAS 18 for estimating chargebacks, returns, rebates and price adjustments) and it is currently anticipated that the standard will be adopted on a modified retrospective basis It is, though, noted that the Group s current accounting policy to defer revenue recognition in isolated circumstances where dynamic market circumstances mean that the ultimate net selling price cannot be reliably measured (as currently applied under IAS 18), will need to be revised. IFRS 15 requires variable consideration to be included in the transaction price (albeit only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur). As the Group has rarely deferred revenue under IAS 18 on the basis of being unable to reliably measure the ultimate net selling price, this change in the Group s stated accounting policy is not anticipated to give rise to a significant difference. 127 Hikma Pharmaceuticals PLC 127